What is Cryptocurrency?
The question of “what is cryptocurrency” has been a hot topic recently. March 2018 saw a new term added to the Merriam-Webster Dictionary, that is, cryptocurrency. Maybe you’re not so familiar with this term, but you might have heard of Bitcoin.
Cryptocurrency is the combination of cryptography and currency. Essentially, it is a type of currency or money. More specifically, cryptocurrency is a type of digital or virtual currency. In the world of crypto currency, cryptography is used to secure a financial transaction. Numerous cryptographic algorithms and technologies are used in a cryptocurrency system to safeguard the entries carried out in it.
Thanks to blockchain technology, cryptocurrency can be safely created and transferred via peer-to-peer transactions. This differs from traditional currency system since the latter depends on third-party financial institutions such as a central bank or government. Blockchain technology provides cryptocurrency with the benefits of decentralization, transparency and immutability.
A cryptocurrency system can be established once the following requirements are met:
√ A central authority isn’t needed and distributed consensus is called for;
√ A cryptocurrency system should define the currency unit and its ownership;
√ Whether a new cryptocurrency unit can be added should be determined by the system;
√ The ownership of a cryptocurrency unit can be verified by encryption alone.
What’s the Mechanism of Cryptocurrency?
The mechanism of cryptocurrency depends on blockchain technology and cryptocurrency mining.
Blockchain technology allows everyone to check and verify transactions since it acts as a digital ledger. For instance, the Bitcoin blockchain records the wallets and transactions of all users who are receiving or transferring the bitcoin. This list is fundamental as payment can be carried out safely between strangers without the need for verification by a third party like a central bank.
Cryptocurrency consists of a network of peers and each peer has a record on all transactions so that the balance of all accounts can be tracked and recorded. The transaction is just a file writing “A will pay X cryptocurrencies (Bitcoin cryptocurrency for example) to B” and is signed by A’s private key. Then, a transaction is broadcast on the network from peer to peer. Next, the whole network will be aware of the “news”. However, it won’t be confirmed until a specific amount of time goes by. If a transaction isn’t confirmed, it will remain pending and can be forged. As soon as it is confirmed, however, it isn’t forged any more. Either way it is irreversible.
In a cryptocurrency system, only miners have a right to confirm transactions. They get transactions, confirm legitimacy and spread the confirmations on the blockchain. After miners’ confirmations, each peer must add it to their database, and it’ll become a part of the blockchain. Miners get paid in cryptocurrencies. As a result, their job, or cryptocurrency mining is the most important in the cryptocurrency system.
What Properties does Cryptocurrency Hold?
Compared with regular money, cryptocurrency has some unique properties.
Property#1: Cryptocurrency is managed by a network of computers running open source code.
Property#2: Cryptocurrency prices are primarily based on supply and demand.
Property#3: Cryptocurrency is secured by a network of computers verifying every transaction. Essentially, anyone with Internet access can participate.
Property#4: Cryptocurrency has no physical bills or coins as counterparts.
Property#5: Cryptocurrencies can be used to buy things if the merchants accept them.
How Many Cryptocurrencies Are There?
Based on CoinMarketCap, a cryptocurrency market research website, more than 5,000 different cryptocurrencies currently exist. As of January 16, 2020, the overall market cap of reached $236 billion. The most popular cryptocurrency, Bitcoin, had a total value of about $157 billion, accounting for 66.7% of the entire market cap.
Bitcoin remains the most popular cryptocurrency. It was first created as early as 2008, by Satoshi Nakamoto, who defined Bitcoin in its white paper. In addition, Satoshi said he established “A Peer-to-Peer Electronic Cash System” in his announcement of Bitcoin in late 2008. After a couple of months, the first batch of Bitcoin came into the cryptocurrency market.
Bitcoin is usually compared to gold because it has a limited supply, that is, 21 million at most. Unlike gold, however, Bitcoin is a digital currency. It is more easily split, transferred and stored.
Pros and Cons of Cryptocurrency
Pros of Cryptocurrency
Easy and Fast Transactions
Cryptocurrency makes transactions easy and fast due to its peer-to-peer mode. Banks and credit card companies are no longer needed to complete transactions. All the transactions within the cryptocurrency system are achieved through public key or private key and different forms of incentive systems.
Minimal Processing Fees
A user wallet or account address only features a public key and the private key is only known by the owner. Either public keys or private keys are used for transaction signing. Steep transaction fees are avoided due to the lack of financial institutions. Therefore, the lowest fees are required for a transaction, which is surely an overwhelming advantage for cryptocurrency.
All men are created equal. That is especially true in the cryptocurrency market. No matter where you’re from or where you live, you’re able to gain access to cryptocurrencies as long as you have a smartphone or another device connected to the Internet. This especially works for those who can’t obtain bank accounts or credit cards. Peer-to-peer transactions between two strangers will possibly make a better world from that point of view. Besides, it’s also a fair system as far as cryptocurrency mining is concerned. Everyone has a chance to be a cryptocurrency miner and to gain profit from cryptocurrency mining.
Thanks to blockchain technology and a series of complicated algorithms, cryptocurrency transactions can maintain security, reducing the likelihood of identity or account theft. As a result, users’ digital assets can be well protected and double spending is avoided.
As with most products and services, cryptocurrency prices depend on the relation between supply and demand. Supply refers to attainable currency quantity while demand derives from people’s expectations on them. The fluctuation of cryptocurrency prices will possibly make you a great fortune. In addition, cryptocurrency miners can gain profit from cryptocurrency mining and this opportunity is equal for everyone.
Cons of Cryptocurrency
The anonymity of cryptocurrency means that it is often used to carry out illegal activities like money laundering or tax avoidance. Nevertheless, the anonymity feature also protects users’ privacy and security. All coins have two sides. The extent to which a cryptocurrency company keeps the balance between privacy and illegal risk depends on its service performance and technology development.
Is Cryptocurrency the Future of Money?
Speculators believe cryptocurrencies will become the money of the future, so they want to acquire as much as possible before their prices become too high.
Due to their role as digital assets, cryptocurrencies are not easily managed by governments. However, with increased regulations on the way this may not be the case forever. However, cryptocurrency is still controlled by the overall market. The running of the cryptocurrency market depends on blockchain technology that is a distributed processing and recording system. The system is theoretically immutable. So, it is more secure than a conventional database or payment system.
Let’s recall the history of the money we use today. From bartered exchange to any form of fixed currency, shells, stones etc., a conclusion can be made: a currency calls for stability. Currency stability is beneficial for merchants and consumers to acquire fair prices. The price of Bitcoin and most cryptocurrencies, however, is usually unstable. For example, the trading value of Bitcoin cryptocurrency approached $20 thousand in December 2017, but it declined to $3.2 thousand only one year later. In May 2019, the number exceeded $8 thousand. The value fluctuation surely brings forward worries and disbelief.
The legality of cryptocurrency is another deep concern. Not all countries accept its legality. Whether it can be legally applied totally depends on a country’s attitude and laws.
So, after reading this article, you must have a brief understanding of what is cryptocurrency. But what will be the future of cryptocurrency? Let’s wait and see.